Premera won’t get for-profit status

SEATTLE – Premera Blue Cross, one of the state’s largest nonprofit health insurers, on Thursday lost a high-stakes gamble to raise millions of dollars by becoming a for-profit company owned by shareholders.

“I am denying the application,” said state Insurance Commissioner Mike Kreidler, standing in the glare of TV news lights at a Seattle hotel conference room. A key reason, he said, is that the insurer “failed to offer any meaningful information” about why it needs to raise more money – or how it would spend it.

“They never made the case,” said Cassie Sauer, a spokeswoman for the state Hospital Association, one of numerous groups that fought Premera’s proposal.

Also, Kreidler said, a Premera that answers to shareholders would be more likely to increase premiums. That’s particularly true in Eastern Washington, he said, where the company has a large share of the private health insurance market.

“He’s made the right decision for Eastern Washington today,” said Kyle Tanner, with Washington Citizen Action.

Premera, which hoped to raise $100 million to $150 million by converting to a for-profit, had spent more than two years and $35 million trying to convince Kreidler to approve the plan.

“It’s very disappointing that the investment that was made to position the company to serve our members better in the future has led to this decision,” said Premera spokesman Scott Forslund.

Contrary to critics’ claims, he said, Premera’s been very clear on why it needs the money. The cash would bolster Premera’s reserves, allowing it to insure more customers and invest in efficiency-boosting technology.

Despite having its proposal shot down, Forslund said, the company remains stable and strong.

“This is not a cash-strapped company,” he said. The company’s chief legal officer, Yori Milo, said that premiums will not rise to cover the cost of Premera’s proposal.

The company, which insures more than 1.2 million Washingtonians, may appeal Kreidler’s decision in court. Milo said the decision seems to conflict with the expert testimony during 11 days of hearings last May, as well as with the state law regulating such conversions.

Kreidler’s conclusions, spelled out in a 58-page ruling, mirrored the concerns of patients, health-care providers and advocates who deluged Kreidler’s office with more than 5,000 letters, e-mails, postcards and phone calls. Most blasted Premera’s proposal.

“When you go for-profit, it’s just what it says: for profit,” said 76-year-old Nancy Gillespie, of Spokane. “I have no problem with them turning a profit as a nonprofit, but the money should be plowed back into the business.”

Premera client George Thomas, a retired Spokane machinist, is irked that the company spent so much money on the proposal.

“Thirty-five million dollars. They must have really wanted it, for some reason,” he said. “Some of my money that went for coverage had to have been spent on pursuing this. That upsets me.”

Washington Citizen Action and other critics argue that one of Premera’s main motivations for wanting to convert was the plan’s millions of dollars in stock options for company executives.

“It’s dollar signs – people standing to make a lot of money,” said Tanner.

Not so, Premera officials said in May. The proposed compensation packages are modest and reasonable compared with similar companies, they said. Under the plan, the company’s top 100 managers could receive stock options totaling $6.6 million over a decade.

Nationwide, 16 of the nonprofit Blue Cross/Blue Shield companies have converted to for-profits, starting in California in 1993. Insurance regulators in Maryland, Kansas, and now Washington have denied three conversions. Blue Cross/Blue Shield of North Carolina abandoned its attempt to convert last year, citing high costs and the threat of stricter regulations.

“None has been approved in the last two years,” said Sauer.

Most of the newly converted plans have been rapidly bought up by two large health insurance companies: Wellpoint and Anthem. That trend was another reason Kreidler cited for denying Premera’s proposal. A converted Premera, he said, would run a high risk of being swallowed up by a larger company. He said the public is best served by a local, autonomous company.

During the hearings in May, Premera officials said that the company’s desire to grow is hampered by the fact that it’s hard for a nonprofit company to come up with large amounts of cash. The primary source of new capital, CEO Gubby Barlow said, is the company’s slim 1.7 percent operating profit. Selling stock would have allowed the company to quickly raise tens of millions of dollars.

The company cited its “Risk-Based Capital” level (RBC), which is a measure of an insurer’s cash compared with the risks of the marketplace. The average RBC for a Blue Cross/Blue Shield plan in December 2002 was 623. Premera’s was 406.

Since then, however, the company’s level has improved. By the end of 2003, it was 433. If Premera hadn’t spent more than $30 million pursing conversion, Kreidler noted in his report, the company’s level would have been closer to 450.

Kreidler also pointed out that the company has recently embarked on expensive projects, including expanding its business into Arizona and spending $125 million on a computerized benefits system.